Inventory Theft: Is Your Company Easy Prey?

By Barry Brandman

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The logistics industry has grown dramatically in the past few years and inventory loss has kept pace. Estimates now range in the $80-billion area for cargo and warehouse related theft. One reason that so many warehousing and transportation companies have incurred loss is that they often rely on ineffective security safeguards. This can prove to be a very costly mistake.

Most of the logistics companies that call us in to investigate unexplainable inventory loss usually have alarm systems, uniformed guards, and/or closed circuit television (CCTV) systems in place. Despite investing in these security measures (and the false sense of security they provide), many logistics firms are losing six and even seven figures to internal theft.

The reality is that alarm systems are designed to protect distribution centers from break and entry, not internal theft. When a facility is in operation, the alarm system is deactivated, thereby negating most of its value in terms of preventing employee dishonesty.

Video equipment will not typically stop theft either. As we've documented on numerous cases, employees are not intimidated by the existence of cameras—unless the cameras are being regularly monitored. Unfortunately, few companies actually use their video equipment after the novelty of having it wears off. Much like a piece of exercise equipment, CCTV only provides a benefit if it's regularly used.

A third-party logistics firm on the West Coast asked us to investigate an unexplainable $218,000 inventory loss. When our investigators arrived on the scene, they wanted to view shipping and receiving activity. When they began to review videotapes from the company's CCTV library, they found that the videocassette recorder had been set to record in the wrong time-lapse mode, and several of the cameras in the facility were in disrepair. Because no one had been regularly viewing the videotape, management didn't find out that the video system was not functioning properly and was useless in this investigation.

The problem with uniformed guards in a logistics facility is that they are not trained to recognize the most costly forms of inventory loss. One recent investigation illustrates this point. Guards were stationed at the gate and routinely inspected all trucks departing the facility. Two employees, who were creating falsified paperwork, were able to steal more than $70,000 of inventory. The guards were easily fooled by what they thought were legitimate shipping manifests and purchase receipts that the employees had actually printed on their home computers.

Another reason why logistics-related theft can add up is a reluctance on the part of some executives to accept theft as a reason behind their inventory discrepancies. Rather than face the reality that dishonesty is eroding their profits, executives go into denial and assume that it's simply an accounting accrual or a problem with their warehouse management system. By the time they come to grips with reality, the theft has continued, or escalated, and the financial loss is substantial.

Security Solutions that Really Work

While alarms, CCTV, and uniform security personnel have limitations, the following safeguards have proven to be extremely effective:

Placing a trained undercover investigator into the operation, who appears to be just another worker to everyone else. Because theft is easily camouflaged as standard operating procedure, it's often necessary to gain an insider's perspective to detect it. By working alongside warehouse personnel, the investigator can observe the theft, and may even be asked to participate.

A large distribution facility was consistently off in its cycle counts and contracted with us to place undercover operatives on the day and night shifts. One of the undercover agents, who was working on the receiving dock, observed another receiver having a private conversation with an inbound trucker. The agent then witnessed what appeared to be a money transaction between the two parties.

The investigator later observed the same receiver signing the manifest for 88 cases of product. When the investigator began putting the product into inventory, he only came up with 84 cases. At that point, the operative confirmed what he had just witnessed: the receiver took a kickback for signing for a full inbound load when he allowed the trucker to keep four of the cases.

The next time that trucker arrived, the undercover investigator was closely monitoring the transaction and witnessed a similar occurrence. Over the next two months, we secretly videotaped more than two dozen transactions between the driver and receiver. Both were apprehended and the company was reimbursed by its insurance company.

Similarly devious (and equally silent) methods of theft can occur within the shipping, returns, pickup, and transfer functions. Without having someone on the inside, these forms of fraud can go undetected for long periods of time.

Establishing an 800 tipline program for employees has repeatedly proven that honest employees don't want to work alongside thieves. They are usually reluctant, however, to come forward, out of fear of being exposed to those on whom they report. Setting up a tipline that offers employees complete anonymity, and promoting it in a positive light, often makes the difference between honest employees telling what they know or remaining silent.

Last year, we received more than 200 calls to our tipline from concerned employees giving information about co-workers, vendors, and contractors who were committing various forms of theft and collusion. Better than 90 percent of the calls were verified and resulted in terminations or arrests.

One such anonymous call received by our hotline exposed collusion between a security officer and a trucker. The security officer was responsible for attaching pre-numbered security seals on all outbound trucks. Each seal number affixed to a truck was supposed to correspond to the same number printed on the shipping manifest.

As part of the scam, the security officer would affix an unauthorized pre-numbered seal to the rear door of an outbound truck, giving the illusion that it was properly secured. He would then give the collusive driver the actual seal that corresponded to the manifest, for use later. This allowed the driver to go off route, break the seal, open the cargo doors, and unload product. Then, he would simply apply the correct seal, once again making the truck appear properly secured.

When the receiving facility came up short, it assumed that the shipping facility was responsible because the truck had the proper seal when it arrived. In all, a simple yet effective scam.

After receiving the anonymous tip about this scam, we had the trucker in question placed under surveillance, and documented him offloading goods from his truck. Without this information, odds are these partners in crime would still be operating completely undetected.

Don't Tolerate Theft-Related Loss

Too many companies have accepted theft-related loss as an unavoidable cost of doing business. This is one reason why thieves have become more brazen and logistics theft is increasing.

In reality, there is no reason to succumb to a victim mentality when you can control theft. In order to do so, you must develop and maintain effective, not superficial, loss-prevention safeguards. If you know or suspect that you are being victimized, aggressively investigate. Catching the guilty parties and criminally prosecuting them sends a strong message that your company will not tolerate internal theft.